Morning Foreign Exchange Report - Euro Rally Threatened by Irish Banking Stress Test as GBP/EUR Rate Stays Low

Published: Thursday, 31 March 2011 06:03 BST - Written by John Cameron

STORY LINK Morning Foreign Exchange Report - Euro Rally Threatened by Irish Banking Stress Test as GBP/EUR Rate Stays Low

The Pound Euro exchange rate (GBP/EUR) is 1.1382. The Euro Dollar exchange rate (EUR/USD) is 1.4136.

Yesterday’s session saw a rare piece of positive data for the Pound, with the release of better-than-anticipated Services Sector data by the UK Office of National Statistics. The figure showed that the key services sector grew by 1.3% between December and January. This showed a major turnaround from December’s number, which showed a monthly contraction of 1.1%.

With the service industry comprising the majority of UK economic activity, the pickup in service sector activity bodes well for the Quarter One GDP growth figure which is due for release soon.

Alarmingly for investors holding Sterling-denominated assets, even with this positive data release, the Pound failed to make significant gains, with the GBP/EUR rate still loitering in the 1.13s, perilously close to its 5 month low, at the end of the European session. It has been the way with recent UK data releases that even when they beat expectations, (e.g. Tuesday’s the upward revision to UK Q4 GDP figure), the Pound still fails to pick up ground. This is indication of how market sentiment towards Sterling remains extremely negative.

Further pressure was applied to the Pound, with the overnight release of this month’s GfK Consumer Confidence Survey, which showed that UK Business Confidence remains at its lowest level since 2009.

The major risk event for the Euro today comes when the Irish Central Bank releases the results of its Stress Test on the Irish Retail Banking Sector. Speculation in the markets suggests that the results of the test may provide cause for concern, with the funding gap in the Irish banking sector proving to be even larger than had been estimated in November. The Irish banks were in such a state at this time that the Irish government was forced to approach the ECB and IMF for emergency funding to plug the gaps.

Fears over liquidity issues in the European retail banking sector have eased over recent months with the spotlight shifting instead to Sovereign Debt concerns. However, a negative Irish Stress Test result could alter this, causing serious potential for a weakening of the Euro which would see it convincingly reject the top-of-the-range rates which have been reached on both GBP/EUR and EUR/USD in recent sessions.

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